Butterfly-spread arbitrage for nonconvex call prices

ID: butterfly-spread-arbitrage-for-nonconvex-call-prices

The midpoint butterfly buys half a call at each outer strike and sells one at the middle strike. Convexity of makes its terminal payoff nonnegative. A violation of the displayed price inequality makes its cost negative and creates arbitrage. The payoff is triangular between the outer strikes and zero elsewhere.

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